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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)    
     
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
  For the fiscal year ended December 31, 2019  
     
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)

 

             Texas

74-1733016

(State or other jurisdiction of incorporation or organization)

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

   

555 IH 35 South, New Braunfels, TX

78130

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (830) 302-5200

 

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

 

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                                         

Yes ☑           No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.                                   

Yes ☐           No

 

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 filer Accelerated 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 ☑

 

The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2019 was approximately $1,193,177,826 based upon the last sales price on June 28, 2019 on The NASDAQ Global Select MarketSM of $36.52 for the registrant’s Class A Common Stock and $36.91 for the registrant’s Class B Common Stock. Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The registrant had 28,042,484 shares Class A Common Stock and 8,210,581 shares of Class B Common Stock outstanding on February 12, 2020.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s definitive proxy statement for the registrant’s 2020 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2019, are incorporated by reference into Part III of this Form 10-K.

 

 

 

 

RUSH ENTERPRISES, INC.

 

Index to Form 10-K

 

Year ended December 31, 2019

  

 

    Page No.

Part I

Item 1

Business

  4

Item 1A

Risk Factors

17

Item 1B

Unresolved Staff Comments

24

Item 2

Properties

24

Item 3

Legal Proceedings

24

Item 4

Mine Safety Disclosures

24

     
     

Part II

     

Item 5

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

25

Item 6

Selected Financial Data

27

Item 7

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

28

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

39

Item 8

Financial Statements and Supplementary Data

40

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

73

Item 9A

Controls and Procedures

73

Item 9B

Other Information

75

     

Part III

     

Item 10

Directors, Executive Officers and Corporate Governance

75

Item 11

Executive Compensation

75

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

75

Item 13

Certain Relationships and Related Transactions, and Director Independence

75

Item 14

Principal Accountant Fees and Services

75

     

Part IV

     

Item 15

Exhibits, Financial Statement Schedules

76

Item 16

Form 10-K Summary

78

 

 

 
 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Form 10-K (or otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“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 Company’s financial position, business strategy and plans and objectives of management of the Company for future operations. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. Use of the words “may,” “should,” “continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements reflect 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” 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-K, 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.

 

NOTE REGARDING TRADEMARKS COMMONLY USED IN THE COMPANY’S FILINGS

 

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. 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. FUSO® is a registered trademark of Mitsubishi Fuso Truck and Bus Corporation. 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.

 

PART I

 

Item 1.

Business

 

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

 

Access to Company Information

 

We electronically file annual reports, quarterly reports, proxy statements and other reports and information statements with the SEC. You may read and copy any of the materials that we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to you on the SEC’s website at www.sec.gov.

 

We make certain of our SEC filings available, free of charge, through our website, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports. These filings are available as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our website address is www.rushenterprises.com. The information contained on our website, or on other websites linked to our website, is not incorporated into this report or otherwise made part of this report.

 

4

 

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 the Company’s 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, FUSO, 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. In 2019, we purchased a 50% equity interest in an entity in Canada, Rush Truck Centres of Canada Limited, which currently owns and operates 14 International locations in Ontario, Canada.

 

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.

 

Rush Truck Centers. Our Rush Truck Centers are located in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah and Virginia. The following chart reflects our franchises and parts, service and collision repair operations by location as of February 26, 2020:

 

Rush Truck Center Location

Commercial Vehicle Franchise(s)

Truck

Sales

Parts

and

Service

Collision

Center

Alabama

       

     Birmingham

None

Yes

Yes

No

     Mobile

Peterbilt

Yes

Yes

Yes

Arizona

       

     Flagstaff

Peterbilt

No

Yes

No

     Phoenix

Peterbilt, Hino

Yes

Yes

Yes

     Tucson

Peterbilt, Hino

Yes

Yes

No

     Yuma

Peterbilt

Yes

Yes

No

California

       

     Fontana Heavy-Duty

Peterbilt

Yes

Yes

Yes

     Fontana Medium-Duty

Peterbilt, Hino, Isuzu

Yes

Yes

No

     Fontana Vocational

None

No

Yes

No

     Long Beach

Peterbilt

No

Yes

No

     Ceres

Ford

Yes

Yes

No

     Pico Rivera

Peterbilt

Yes

Yes

Yes

     San Diego

Peterbilt, Hino, Ford

Yes

Yes

No

     Sylmar

Peterbilt

Yes

Yes

No

     Whittier

Ford, Isuzu

Yes

Yes

No

Colorado

       

     Colorado Springs

Peterbilt

Yes

Yes

No

     Denver

Peterbilt, Ford, Isuzu

Yes

Yes

Yes

     Greeley

Peterbilt

Yes

Yes

No

     Pueblo

Peterbilt

Yes

Yes

No

 

5

 

Rush Truck Center Location

Commercial Vehicle Franchise(s)

Truck

Sales

Parts

and

Service

Collision

Center

Florida

       

     Haines City

Peterbilt

Yes

Yes

Yes

     Jacksonville

Peterbilt, Hino

Yes

Yes

No

     Jacksonville East

Peterbilt

Yes

Yes

No

     Lake City

Peterbilt

Yes

Yes

No

     Miami

None

No

Yes

No

     Orlando Heavy-Duty

Peterbilt, Isuzu

Yes

Yes

No

     Orlando Light & Medium-Duty

Ford

Yes

Yes

No

     Orlando North

Isuzu

Yes

Yes

No

     Orlando South

Isuzu

Yes

Yes

No

     Tampa

Peterbilt

Yes

Yes

No

Georgia

       

     Atlanta

International, Hino, Isuzu, IC Bus

Yes

Yes

No

     Atlanta Bus Center

IC Bus

Yes

Yes

Yes

     Augusta

International, IC Bus

Yes

Yes

No

     Blackshear

International, IC Bus

Yes

Yes

No

     Columbus

International, Isuzu, IC Bus

Yes

Yes

No

     Doraville

International, Hino, Isuzu, IC Bus

Yes

Yes

No

     Gainesville

International, IC Bus

Yes

Yes

No

     Macon

International

Yes

Yes

No

     Smyrna

International, Hino, Isuzu, IC Bus

Yes

Yes

No

     Tifton

International, IC Bus

Yes

Yes

No

     Valdosta

International

Yes

Yes

No

Idaho

       

     Boise

International, Hino, IC Bus

Yes

Yes

Yes

     Idaho Falls

International, IC Bus

Yes

Yes

Yes

     Lewiston

International

Yes

Yes

No

     Twin Falls

International

Yes

Yes

No

Illinois

       

     Bloomington

International, Hino

Yes

Yes

No

     Carol Stream

International

Yes

Yes

No

     Champaign

International

Yes

Yes

Yes

     Chicago

International

Yes

Yes

Yes

     Effingham

International

Yes

Yes

Yes

     Huntley

International

Yes

Yes

No

     Joliet

International

Yes

Yes

No

     Quincy

International

Yes

Yes

No

     Springfield

International

Yes

Yes

Yes

Indiana

       

     Gary

International

Yes

Yes

No

     Indianapolis

International

Yes

Yes

Yes

Kansas

       

     Kansas City

Hino, Isuzu

Yes

Yes

No

Kentucky

       

     Bowling Green

Peterbilt

Yes

Yes

No

Missouri

       

     St. Peters

International

Yes

Yes

No

     St. Louis

International

Yes

Yes

No

Nevada

       

     Las Vegas

Peterbilt

Yes

Yes

No

New Mexico

       

     Albuquerque

Peterbilt

Yes

Yes

Yes

     Farmington

Peterbilt

No

Yes

No

     Las Cruces

Peterbilt

Yes

Yes

No

 

6

 

Rush Truck Center Location

Commercial Vehicle Franchise(s)

Truck

Sales

Parts

and

Service

Collision

Center

North Carolina

       

     Asheville

International

Yes

Yes

No

     Charlotte

International, Hino, Isuzu

Yes

Yes

Yes

     Hickory

International

Yes

Yes

No

Ohio

       

     Akron

International, IC Bus

Yes

Yes

No

     Cincinnati

International, IC Bus, Isuzu, Ford, FUSO

Yes

Yes

Yes

     Cleveland

International, IC Bus

Yes

Yes

No

     Columbus

International, IC Bus, Isuzu(1)

Yes

Yes

No

     Dayton

International, IC Bus, Isuzu

Yes

Yes

No

     Lima

International, IC Bus

Yes

Yes

No

Oklahoma

       

     Ardmore

Peterbilt

Yes

Yes

No

     Oklahoma City

Peterbilt, Hino, Ford, Isuzu

Yes

Yes

Yes

     Tulsa

Peterbilt, Hino

Yes

Yes

Yes

Pennsylvania

       

     Greencastle

None

Yes

Yes

No

Tennessee

       

     Memphis

None

Yes

Yes

No

     Nashville

Peterbilt

Yes

Yes

Yes

Texas

       

     Abilene

Peterbilt

Yes

Yes

No

     Amarillo

Peterbilt

Yes

Yes

No

     Austin

Peterbilt, Hino, Isuzu, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Austin North

Peterbilt

No

Yes

No

     Beaumont

Peterbilt

Yes

Yes

No

     Brownsville

Peterbilt, Elkhart

Yes

Yes

No

     College Station

Peterbilt

Yes

Yes

No

     Corpus Christi

Peterbilt, Hino, Isuzu, Blue Bird, Elkhart

Yes

Yes

No

     Cotulla

Peterbilt

No

Yes

No

     Dalhart

Peterbilt

No

Yes

No

     Dallas Heavy-Duty

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

     Dallas Medium-Duty

Peterbilt, Hino,

Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Dallas Light & Medium-Duty

Ford, Isuzu

Yes

Yes

No

     El Paso

Peterbilt, Hino, Isuzu

Yes

Yes

Yes

     Fort Worth

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Houston

Peterbilt, Hino

Yes

Yes

Yes

     Houston Bus Center

Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Houston Medium-Duty

Peterbilt, Hino

Yes

Yes

No

     Laredo

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

     Lubbock

Peterbilt

Yes

Yes

No

     Lufkin

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

     Odessa

Peterbilt

Yes

Yes

No

     Pharr

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

 

 

(1)

Our Isuzu franchise is operated out of our Rush Truck Leasing - Columbus location.

 

7

 

Rush Truck Center Location

Commercial Vehicle Franchise(s)

Truck

Sales

Parts

and

Service

Collision

Center

     San Antonio

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

     San Antonio Bus

Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

     Sealy

Peterbilt, Isuzu, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Texarkana

Peterbilt, Hino, Isuzu,

Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Tyler

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

     Victoria

Peterbilt

Yes

Yes

No

     Waco

Peterbilt, Hino, Isuzu,

Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Utah

       

     Ogden

International, IC Bus

Yes

Yes

No

     Salt Lake City

International, IC Bus, FUSO

Yes

Yes

Yes

     Springville

International, FUSO

Yes

Yes

No

     St. George

International, FUSO

Yes

Yes

No

Virginia

       

     Chester

International, Hino

Yes

Yes

No

     Fredericksburg

International

Yes

Yes

No

     Richmond

International

Yes

Yes

Yes

 

Leasing and Rental Services. Through certain of our Rush Truck Centers and several stand-alone Rush Truck Leasing Centers, we provide a broad line of product selections for lease or rent, including Class 4, Class 5, Class 6, Class 7 and Class 8 trucks, heavy-duty cranes and refuse vehicles. Our lease and rental fleets are offered on a daily, monthly or long-term basis. Substantially all of our long-term leases also contain a service provision, whereby we agree to service the vehicle through the life of the lease. The following chart reflects our leasing franchises by location:

 

Rush Truck Leasing

Location

Franchise

Standalone or in a

Rush Truck Center

Alabama

   

    Birmingham

PacLease

In RTC

Arizona

   

    Phoenix

PacLease

Standalone

California

   

    Fontana 

PacLease

Standalone

    Pico Rivera

PacLease

Standalone

    San Diego

PacLease

Standalone

    Sylmar

PacLease

In RTC

Colorado

   

    Denver 

PacLease

Standalone

Florida

   

    Orlando

PacLease

Standalone

    Tampa

PacLease

In RTC

    Jacksonville

PacLease

Standalone

Georgia

   

    Macon

Idealease

In RTC

Idaho

   

    Boise

Idealease

In RTC

    Idaho Falls

Idealease

In RTC

Illinois

   

    Carol Stream

Idealease

In RTC

    Chicago

Idealease

In RTC

    Effingham

Idealease

In RTC

    Huntley

Idealease

In RTC

    Joliet

Idealease

In RTC

    Springfield

Idealease

In RTC

 

8

 

Rush Truck Leasing

Location

Franchise

Standalone or in a

Rush Truck Center

Indiana

   

    Indianapolis

Idealease

In RTC

    Gary

Idealease

In RTC

Missouri

   

    St. Louis

Idealease

In RTC

    St. Peters

Idealease

In RTC

New Mexico

   

    Albuquerque

PacLease

Standalone

Nevada

   

    Las Vegas

PacLease

Standalone

North Carolina

   

    Charlotte

Idealease

Standalone

Ohio

   

    Cincinnati

Idealease

Standalone

    Cleveland

Idealease

Standalone

    Columbus

Idealease

In RTC

    Dayton

Idealease

In RTC

Oklahoma

   

    Oklahoma City

PacLease

In RTC

Tennessee

   

    Nashville

PacLease

In RTC

Texas

   

    Austin

PacLease

Standalone

    El Paso

PacLease

In RTC

    Fort Worth

PacLease

Standalone

    Houston

PacLease

Standalone

    Houston NW

PacLease

In RTC

    Odessa

PacLease

Standalone

    San Antonio

PacLease

In RTC

    Tyler

PacLease

Standalone

Virginia

   

    Richmond

Idealease

Standalone

    Norfolk

Idealease

Standalone

Utah

   

    Salt Lake City

Idealease

Standalone

 

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

 

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

 

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

 

World Wide Tires stores operate in two locations in Texas. World Wide Tires primarily sells tires for use on commercial vehicles.

 

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

 

The House of Trucks operates at locations in Miami, Florida, Dallas, Texas and Chicago, Illinois. The House of Trucks sells used commercial vehicles, new and used trailers and offers third-party financing and insurance products.

 

9

 

Momentum Fuel Technologies manufactures compressed natural gas fuel systems and related component parts for commercial vehicles at its facility in Roanoke, Texas.

 

Industry

 

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

 

Our Business Strategy

 

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

 

 

Management by Dealership Units. At each of our dealerships, we operate one or more of the following departments: new commercial vehicle sales, used commercial vehicle sales, financial services, parts, service or collision center. Our general managers measure and manage the operations of each dealership according to the specific departments operating at that location. We believe that this system enhances the profitability of all aspects of a dealership and increases our overall operating margins. Operating goals for each department at each of our dealerships are established annually and managers are rewarded for performance relative to these goals.

 

 

One-Stop Centers. We have developed our larger commercial vehicle dealerships as “one-stop centers” that offer an integrated approach to meeting customer needs. We provide service, including collision repairs, parts, new and used commercial vehicles sales, leasing and rental, plus financial services including finance and insurance. We believe that this full-service strategy also helps to mitigate cyclical economic fluctuations because our parts, service and collision center operations (referred to herein collectively as “Aftermarket Products and Services”) at our dealerships generally tend to be less volatile than our new and used commercial vehicle sales.

 

 

Aftermarket Products and Services. Our aftermarket capabilities include a wide range of services and products, including a fleet of mobile service units, mobile technicians who work in our customers’ facilities, vehicle telematics support, a proprietary line of parts and accessories, factory-certified service for assembly services for specialized bodies and equipment. We believe that offering a variety of Aftermarket Products and Services at our dealerships and other locations allows us to meet the expanding needs of our customers. We continually strive to leverage our dealership facilities to offer more products and services to our customers.

 

 

Branding Program. We employ a branding program at all of our dealerships through distinctive signage and uniform marketing programs to take advantage of our existing name recognition and to communicate the standardized high quality of our products and reliability of our services throughout our dealership network.

 

Growth Strategy. Through our strategic expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of commercial vehicle dealerships. We also own a 50% equity interest in an entity in Canada that owns and operates 14 International locations in Ontario, Canada, with an option to purchase the remaining 50%. As described below, we intend to continue to grow our business by expanding our product and service offerings, through acquisitions in new geographic areas and by opening new locations to enable us to better serve our customers.

 

 

Expansion of Product and Service Offerings. We intend to continue to expand our product lines within our existing locations by adding product categories and service capabilities that are both complementary to our existing product lines and well suited to our operating model. We will continue to take advantage of technological advances that will provide us with the opportunity to offer vehicle owners more aftermarket options and the ability to maximize the performance of vehicles in their fleets using telematics and other technologies.

 

 

Expansion Into New Geographic Areas. We plan to continue to expand our dealership network by acquiring existing dealerships or opening new locations in areas where we do not already have locations. We believe the geographic diversity of our Rush Truck Center network has significantly expanded our customer base while reducing the effects of local economic cycles.

 

10

 

 

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

 

Management of Our Dealerships

 

Rush Truck Centers

 

Our Rush Truck Centers are responsible for sales of new and used commercial vehicles, as well as related parts and services.

 

Aftermarket Products and Services. Revenues from Aftermarket Products and Services accounted for approximately $1,762.5 million, or 30.3%, of our total revenues for 2019, and 64.9% of our gross profit. Our Aftermarket Products and Services enable our commercial vehicle sales function and are a source of recurring revenue. Rush Truck Centers carry a wide variety of commercial vehicle parts in inventory. Certain Rush Truck Centers also feature fully equipped service and collision center facilities, the combination and configuration of which varies by location, capable of handling a broad range of repairs on most commercial vehicles. Each Rush Truck Center with a service department is a warranty service center for the commercial vehicle manufacturers represented at that location, if any, and most are also authorized service centers for other vehicle component manufacturers, including Cummins, Eaton, Caterpillar and Allison. We also have mobile service technicians and technicians who staff our customers’ facilities upon request.

 

Our service departments perform warranty and non-warranty repairs on commercial vehicles. The cost of warranty work is generally reimbursed by the applicable manufacturer at retail commercial rates. Warranty-related parts and service revenues accounted for approximately $135.8 million, or 2.3%, of our total revenues for 2019. Additionally, we provide a wide array of services, including assembly services for specialized commercial vehicle bodies and commercial vehicle mounted equipment. Our goal is to provide our customers with any service that they need related to their commercial vehicles.

 

As part of our leasing and rental operations, we also enter into contracts to provide full-service maintenance on certain customers’ vehicles. We had 1,084 vehicles under contract maintenance as of December 31, 2019, and 1,094 vehicles under contract maintenance as of December 31, 2018. The full-service maintenance revenues and retail service revenues are included as Aftermarket Products and Services revenues on our Consolidated Statements of Income.  

  

New Commercial VehicleSales.   New commercial vehicle sales represent the largest portion of our revenues, accounting for approximately $3,427.3 million, or 59.0%, of our total revenues in 2019. Of this total, new Class 8 heavy-duty truck sales accounted for approximately $2,192.3 million, or 37.7%, of our total revenues for 2019, and 64.0% of our new commercial vehicle revenues for 2019.

 

Our Rush Truck Centers that sell new and used Class 8 heavy-duty trucks manufactured by Peterbilt or International may also sell medium-duty and light-duty commercial vehicles. Certain Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, Hino, Isuzu, Ford, International or FUSO, buses manufactured by Blue Bird, IC Bus or Elkhart and light-duty commercial vehicles manufactured by Ford (see Part I, Item 1, “General – Rush Truck Centers” for information on which brands we sell at each Rush Truck Center). New medium-duty commercial vehicle sales, excluding new bus sales, accounted for approximately $1,003.6 million, or 17.3%, of our total revenues for 2019, and 29.3% of our new commercial vehicle revenues for 2019. New light-duty commercial vehicle sales accounted for approximately $90.6 million, or 1.6%, of our total revenues for 2019, and 2.6% of our new commercial vehicle revenues for 2019. New bus sales accounted for approximately $120.4 million, or 2.1%, of our total revenues for 2019, and 3.5% of our new commercial vehicle revenues for 2019.

 

A significant portion of our new commercial vehicle sales are to customers with large fleets of commercial vehicles. Because of the size and geographic scope of our Rush Truck Center network, our strong relationships with our fleet customers and our ability to manage large quantities of used commercial vehicle trade-ins, we are able to successfully market and sell to fleet customers nationwide. We believe that we have a competitive advantage over many dealerships because we can absorb multi-unit trade-ins often associated with fleet sales and effectively disperse the used commercial vehicles for resale throughout our dealership network. We believe that the broad range of products and services we offer to purchasers of commercial vehicles at the time of purchase and post-purchase results in a high level of customer loyalty.

 

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Used Commercial Vehicle Sales.  Used commercial vehicle sales accounted for approximately $330.3 million, or 5.7%, of our total revenues for 2019. We sell used commercial vehicles at most of our Rush Truck Centers and also at our non-franchised used commercial vehicle facilities. We believe that we are well positioned to market used commercial vehicles due to our ability to recondition them for resale utilizing the service and collision center departments of our Rush Truck Centers and our ability to move used commercial vehicles between our dealerships as customer demand warrants. The majority of our used commercial vehicle inventory consists of commercial vehicles taken as trade-ins from new commercial vehicle customers or retired from our lease and rental fleet, but we also supplement our used commercial vehicle inventory by purchasing used commercial vehicles from third parties for resale, as market conditions warrant.

 

Vehicle Leasing and Rental.   Vehicle leasing and rental revenues accounted for approximately $247.5 million, or 4.3%, of our total revenues for 2019. At our Rush Truck Leasing locations, we engage in full-service commercial vehicle leasing through PacLease and Idealease. Rental vehicles are also generally serviced at our facilities. We had 8,506 vehicles in our lease and rental fleet, including cranes, as of December 31, 2019, compared to 8,092 vehicles as of December 31, 2018. Generally, we sell commercial vehicles that have been retired from our lease and rental fleet through our used commercial vehicles sales operations. Historically, we have realized gains on the sale of used lease and rental commercial vehicles.

 

New and Used Commercial Vehicle Financing and Insurance.  The sale of financial and insurance products accounted for approximately $24.4 million, or 0.4%, of our total revenues for 2019. Finance and insurance revenues have minimal direct costs and therefore, contribute a disproportionate share to our operating profits.

 

Many of our Rush Truck Centers have personnel responsible for arranging third-party financing for our product offerings. Generally, commercial vehicle finance contracts involve an installment contract, which is secured by the commercial vehicle financed, and require a down payment, with the remaining balance generally financed over a two-year to seven-year period. The majority of these finance contracts are sold to third parties without recourse to us. We provide an allowance for repossession losses and early repayment penalties that we may incur under these finance contracts.

 

We sell, as agent, a complete line of property and casualty insurance to commercial vehicle owners. Our agency, which operates at locations around the United States outside of our Rush Truck Centers, is licensed to sell commercial vehicle liability, collision and comprehensive, workers’ compensation, cargo, and credit life insurance coverage offered by a number of leading insurance companies. Our renewal rate in 2019 was approximately 77%. We also have licensed insurance agents at several Rush Truck Centers.

 

Sales and Marketing

 

Our established history of operations in the commercial vehicle business has resulted in a strong customer base that is diverse in terms of geography, industry and scale of operations. Our customers include regional and national truck fleets, corporations, local and state governments and owner-operators. During 2019, no single customer accounted for more than 10% of our sales by dollar volume. We generally promote our products and related services through direct customer contact by our sales personnel and advertising.

 

Facility Management

 

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

 

Compliance with Policies and Procedures. Each Rush Truck Center is audited regularly for compliance with corporate policies and procedures. These internal audits objectively measure dealership performance with respect to corporate expectations in the management and administration of sales, commercial vehicle inventory, parts inventory, parts sales, service sales, collision center sales, corporate policy compliance and environmental and safety compliance matters.

 

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Purchasing and Suppliers. Because of our size, we benefit from volume purchases at favorable prices that permit us to achieve a competitive pricing position in the industry. We purchase our commercial vehicle inventory and proprietary parts and accessories directly from the applicable vehicle manufacturer, wholesale distributors, or other sources that provide the most favorable pricing. Most purchasing commitments are negotiated by personnel at our corporate headquarters. Historically, we have been able to negotiate favorable pricing levels and terms, which enable us to offer competitive prices for our products.

 

Commercial Vehicle Inventory Management. We utilize our management information systems to monitor the inventory level of commercial vehicles at each of our dealerships and transfer new and used commercial vehicle inventory among Rush Truck Centers as needed.

 

Parts Distribution and Inventory Management. We utilize a parts inventory distribution and management system that allows for the prompt transfer of parts inventory among various Rush Truck Centers. The transfer of inventory reduces delays in delivery, helps maximize inventory turns and assists in controlling problems created by overstock and understock situations. Our network is linked to our major suppliers for purposes of ordering parts and managing parts inventory levels. Automated reordering and communication systems allow us to maintain proper parts inventory levels and permit us to have parts inventory delivered to our locations, or directly to customers, typically within 24 hours of an order being placed.

 

Recent Acquisitions, Dispositions and Equity Method Investment

 

On October 31, 2019, we, along with our joint venture partner, sold substantially all of the assets of Central California Truck & Trailer Sales, LLC (“CCTTS”). The transaction was valued at approximately $12.7 million, with the purchase price paid in cash.

 

On May 6, 2019, we acquired certain assets of Stover Sales, Inc., which included real estate and a used truck dealership in Jacksonville, Florida, along with commercial vehicle and parts inventory. The transaction was valued at approximately $2.3 million, with the purchase price paid in cash.

 

On February 25, 2019, we acquired a 50% 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. RTC Canada currently operates a network of 14 International Truck full-service dealerships throughout the Province of Ontario. We were also granted a call option in the purchase agreement that provides us with the right to acquire the remaining 50% equity interest in RTC Canada until the close of business on February 25, 2024.

 

On February 11, 2019, we acquired certain assets of Country Ford Trucks, which included real estate and a Ford truck franchise in Ceres, California, along with commercial vehicle and parts inventory. The transaction was valued at approximately $7.9 million, with the purchase price paid in cash.

 

Competition

 

There is, and will continue to be, significant competition both within our current markets and in new markets we may enter. We anticipate that competition between us and other dealership groups will continue to increase in our current markets and on a national level based on the following:

 

 

the ability to keep customers’ vehicles operational, which is dependent on the accessibility of dealership locations;

 

 

the number of dealership locations representing the manufacturers that we represent and other manufacturers, which impacts manufacturers’ ability to provide more consistent, higher quality service in a timely manner across their dealership networks;

 

 

price, value, quality and design of the products sold; and

 

 

our attention to customer service (including technical service).

 

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Our dealerships compete with dealerships representing other manufacturers, including commercial vehicles manufactured by Mack, Freightliner, Kenworth and Volvo. We believe that our dealerships are able to compete with other franchised dealerships, independent service centers, parts wholesalers, commercial vehicle wholesalers, rental service companies and industrial auctioneers in distributing our products and providing service because of the following: the overall quality and reputation of the products we sell; the “Rush” brand name recognition and reputation for quality service; the geographic scope of our dealership network; the breadth of commercial vehicles offered in our dealership network; and our ability to provide comprehensive Aftermarket Products and Services, as well as financing, insurance and other customer services.

 

Dealership Agreements

 

Peterbilt. We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt heavy- and medium-duty trucks. Our Peterbilt areas of responsibility currently encompass areas in the states of Alabama, Arizona, California, Colorado, Florida, Kentucky, New Mexico, Nevada, Oklahoma, Tennessee and Texas. These dealership agreements currently have terms expiring between November 2021 and September 2022. Our dealership agreements with Peterbilt may be terminated by Peterbilt in the event that the aggregate voting power of the estate of W. Marvin Rush, W.M. “Rusty” Rush, other members of the Rush family and certain executives of the Company decreases below 22%. Sales of new Peterbilt commercial vehicles accounted for approximately 36.4% of our total revenues for 2019.

 

International. We have entered into nonexclusive dealership agreements with Navistar that authorize us to act as a dealer of International heavy- and medium-duty trucks and, in certain markets, IC buses. Our Navistar areas of responsibility currently encompass areas in the states of Georgia, Idaho, Illinois, Indiana, Missouri, North Carolina, Ohio, Utah and Virginia. These dealership agreements currently have terms expiring between May 2020 and January 2024. Sales of new International commercial vehicles accounted for approximately 11.0% of our total revenues for 2019.

 

Other Commercial Vehicle Suppliers. In addition to our dealership agreements with Peterbilt and Navistar, various Rush Truck Centers have entered into dealership agreements with other commercial vehicle manufacturers, including Blue Bird, Micro Bird and FUSO, which currently have terms expiring between February 2020 and August 2024 and Ford, Hino and Isuzu, which have perpetual terms. Sales of new non-Peterbilt and non-International commercial vehicles accounted for approximately 11.7% of our total revenues for 2019.

 

All of our dealership agreements impose certain operational obligations and financial requirements upon us and the relevant dealerships. In addition, each of our dealership agreements requires the consent of the relevant manufacturer for the sale or transfer of a franchise.

 

Any termination or nonrenewal of our dealership agreements must follow certain guidelines established by both state and federal legislation designed to protect motor vehicle dealers from arbitrary termination or nonrenewal of franchise agreements. The federal Automobile Dealers Day in Court Act and certain other similar state laws generally provide that the termination or nonrenewal of a motor vehicle dealership agreement must be done in “good faith” and upon a showing of “good cause” by the manufacturer for such termination or nonrenewal, as such terms have been defined by statute and interpreted in case law.

 

Floor Plan Financing

 

Most of our commercial vehicle inventory 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. We finance the majority of all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under our credit agreement with BMO Harris Bank N.A. (“BMO Harris”) (the “Floor Plan Credit Agreement”). The Floor Plan Credit Agreement includes an aggregate loan commitment of $1.0 billion. 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 commercial vehicle 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 December 31, 2019, we had approximately $846.8 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $857.8 million during the twelve months ended December 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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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 December 31, 2019, the interest rate on the wholesale financing agreement was 6.25% before considering the applicable incentives that we are qualified to receive. As of December 31, 2019, we had an outstanding balance of approximately $115.0 million under the Ford Motor Credit Company wholesale financing agreement.

 

Product Warranties

 

The manufacturers we represent provide retail purchasers of their products with a limited warranty against defects in materials and workmanship, excluding certain specified components that are separately warranted by the suppliers of such components. We provide a warranty on our proprietary line of parts and related service and the fuel systems manufactured by Momentum Fuel Technologies. We also provide an extended warranty beyond the manufacturer’s warranty on new Blue Bird school buses that we sell in Texas, as required by state law.

 

We generally sell used commercial vehicles in “as is” condition without a manufacturer’s warranty, although manufacturers sometimes will provide a limited warranty on their used products if such products have been properly reconditioned prior to resale or if the manufacturer’s warranty on such product is transferable and has not expired. Although we do not provide any warranty on used commercial vehicles, we offer for sale third-party warranties.

 

Trademarks

 

The trademarks and trade names of the manufacturers we represent, which are used in connection with our marketing and sales efforts, are subject to limited licenses included in our dealership agreements with each manufacturer. The licenses are for the same periods as our dealership agreements. These trademarks and trade names are widely recognized and are important in the marketing of our products. Each licensor engages in a continuous program of trademark and trade name protection. We hold registered trademarks from the U.S. Patent and Trademark Office for the following names used in this document: “Rush Enterprises,” “Rush Truck Center” and “Momentum Fuel Technologies.”

 

Employees

 

On December 31, 2019, we had 7,244 employees. 

 

We have entered into collective bargaining agreements covering certain employees in Chicago, Illinois, which will expire on May 8, 2021, Joliet, Illinois, which will expire on May 7, 2022 and Carol Stream, Illinois, which will expire on May 6, 2023.

 

There have been no strikes, work stoppages or slowdowns during the negotiations of the foregoing collective bargaining agreements or at any time in the Company’s history, although no assurances can be given that such actions will not occur.

 

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.

 

Backlog

 

On December 31, 2019, our backlog of commercial vehicle orders was approximately $1,236.5 million, compared to a backlog of commercial vehicle orders of approximately $1,934.9 million on December 31, 2018. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We include only confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog. The delivery time for a custom-ordered commercial vehicle varies depending on the truck specifications and demand for the particular model ordered. We sell the majority of our new heavy-duty commercial vehicles by customer special order and we sell the majority of our medium- and light-duty commercial vehicles out of inventory. Orders from a number of our major fleet customers are included in our backlog as of December 31, 2019, and we expect to fill the majority of our backlog orders during 2020.

 

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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 third-party recycling, treatment, or disposal facilities under the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes. These statutes impose liability for investigation and remediation of 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 Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”), on behalf of the U.S. Department of Transportation, issued rules associated with reducing greenhouse gas (“GHG”) emissions and improving the fuel efficiency of medium and heavy-duty trucks and buses for model years 2021 through 2027.  We do not believe that these rules will negatively impact our business, however, future legislation or other new regulations that may be adopted to address GHG emissions or fuel efficiency standards may negatively impact our business.  Additional regulations could result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations.

 

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, and those expenditures could be material.

 

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Item 1A.  Risk Factors

 

An investment in our common stock is subject to certain risks inherent to our business. In addition to the other information contained in this Form 10-K, we recommend that you carefully consider the following risk factors in evaluating our business. If any of the following risks actually occur, our financial condition and results of operations could be materially adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.

 

Risks Related to Our Business

 

We are dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generates the majority of our revenues.

 

At certain Rush Truck Centers, we operate as a dealer of Peterbilt trucks and parts pursuant to dealership agreements with Peterbilt, a division of PACCAR. We have no control over the management or operation of Peterbilt or PACCAR. During 2019, the majority of our revenues resulted from sales of trucks purchased from Peterbilt and parts purchased from PACCAR Parts. Due to our dependence on PACCAR and Peterbilt, we believe that our long-term success depends, in large part, on the following:

 

 

our ability to maintain our dealership agreements with Peterbilt;

 

 

the manufacture and delivery of competitively-priced, technologically current, high quality Peterbilt trucks in quantities sufficient to meet our requirements;

 

 

the overall success of PACCAR and Peterbilt;

 

 

PACCAR’s continuation of its Peterbilt division; and

 

 

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

 

A negative change in any of the preceding, or a change in control of PACCAR, could have a material adverse effect on our operations, revenues and profitability. 

 

We are dependent upon Navistar for the supply of International trucks and parts and IC buses and parts, the sale of which generate a significant portion of our revenues.

 

At certain Rush Truck Centers, we operate as a dealer of International trucks and parts and IC buses and parts pursuant to dealership agreements with International and IC Bus, each of which are divisions of Navistar. We have no control over the management or operation of International, IC Bus or Navistar. During 2019, a significant portion of our revenues resulted from sales of trucks purchased from International, buses purchased from IC Bus and parts purchased from Navistar. Due to our dependence on Navistar, International and IC Bus, we believe that our long-term success depends, in large part, on the following:

 

 

our ability to maintain our dealership agreements with International and IC Bus;

 

 

the manufacture and delivery of competitively-priced, technologically current, high quality International trucks and IC buses in quantities sufficient to meet our requirements;

 

 

the overall success of Navistar; and

 

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the maintenance of goodwill associated with the International and IC Bus brands, which can be adversely affected by decisions made by Navistar and the owners of other International and IC Bus dealerships.

 

A negative change in any of the preceding, or a change in control of Navistar, could have a material adverse effect on our operations, revenues and profitability. On January 30, 2020, Navistar disclosed that it received an unsolicited proposal from Traton SE (“Traton”), a subsidiary of Volkswagen Group, to acquire Navistar. At this time, we do not know whether Navistar’s board of directors will accept Traton’s proposal and if so, whether Navistar’s shareholders will approve the sale. Assuming Traton’s proposal is accepted by Navistar’s required constituents and approved by regulatory authorities, we cannot predict how new ownership of Navistar might affect our business; provided, however, that at this time, our senior management is not aware of any circumstances associated with the proposed sale that would result in a material adverse effect on our operations, revenues or profitability.

 

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

 

We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt trucks. Peterbilt may terminate our dealership agreements in the event of a change of control of the Company or if we violate any number of provisions in the dealership agreements. Under our Peterbilt dealership agreements, the following constitute a change of control: (i) with respect to the election of directors, the aggregate voting power held by the estate of W. Marvin Rush, W. M. “Rusty” Rush, James Thor, Scott Anderson, Derrek Weaver, Steven Keller and Corey Lowe, along with certain other persons who no longer work for the company (collectively, the “Dealer Principals”) decreases below 22% (the estate of W. Marvin Rush and such persons, excluding those who no longer work for the company, controlled 40.2% of the aggregate voting power with respect to the election of directors as of December 31, 2019); or (ii) any person or entity other than the Dealer Principals and their respective associates, or any person or entity who has been approved in writing by PACCAR, owns common stock with a greater percentage of the voting power with respect to the election of our directors than the Dealer Principals and their respective associates, in the aggregate, or any person other than W. M. “Rusty” Rush, Robin M. Rush or any person who has been approved in writing by PACCAR holds the office of Chairman of the Board, President or Chief Executive Officer of the Company. We have no control over the transfer or disposition by the estate of W. Marvin Rush or W.M. “Rusty” Rush, or his estate, of their common stock. If the estate of W. Marvin Rush or W.M. “Rusty” Rush were to sell their Class B Common Stock or bequest their Class B Common Stock to a person or entity other than the Dealer Principals, or if their estates are required to liquidate their Class B Common Stock that they own, directly or indirectly, to pay estate taxes or otherwise, the change of control provisions of the Peterbilt dealership agreements may be triggered, which would give Peterbilt the right to terminate our dealership agreements. If our dealership agreements with Peterbilt are terminated, we will lose the right to purchase Peterbilt products and operate as an authorized Peterbilt dealer, which would have a material adverse effect on our operations, revenues and profitability.

 

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

 

Our dealership agreements generally do not provide us with exclusive dealerships in any of the areas of responsibility assigned in each dealer agreement. The manufacturers we represent could elect to create additional dealers in our areas of responsibility in the future, subject to restrictions imposed by state laws. While dealership agreements typically restrict dealers from operating franchised sales or service facilities outside their areas of responsibility, such agreements do not restrict sales or marketing activity outside the areas of responsibility. Accordingly, we engage in sales and other marketing activities outside our assigned areas of responsibility and other dealers engage in similar activities within our areas of responsibility.

 

Our dealership agreements with the manufacturers we represent have current terms expiring between February 2020 and August 2024. Upon expiration of each agreement, we must negotiate a renewal. Management expects that, consistent with in some cases decades of past practice, each of our dealership agreements will be renewed or otherwise extended before its termination date, provided that we do not breach any of the material terms of such agreement.

 

Management attempts to mitigate the risk that any manufacturer would not renew a dealership agreement by providing superior representation of each brand that we represent in each of our areas of responsibility. We deliver superior representation to our manufacturers by continuously investing substantial capital into our dealership locations, marketing and personnel. Senior members of our management team also communicate with management of the manufacturers that we represent on a regular basis, which we believe allows us to identify any potentially problematic issues as early as possible so that we can begin working on mutually agreeable solutions. In addition to the proactive steps that management takes, the risks that our dealership agreements will not be renewed are also mitigated by dealer protection laws that exist in each of the states that our dealerships are located. Many of these state dealer franchise laws restrict manufacturers’ ability to refuse to renew dealership agreements or to impose new terms upon renewal. However, to the extent such laws did allow for nonrenewal or the imposition of new terms, the relatively short terms would give manufacturers the opportunity to exercise such rights. Any nonrenewal or imposition of less favorable terms upon renewal could have an adverse impact on our business and in the case of the Peterbilt or Navistar dealership agreements, would have an adverse impact on our business.

 

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If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, nonrenewal or renegotiation of their dealership agreements.

 

We depend on our vehicle dealership agreements for a substantial portion of our revenues and profitability. State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a dealership agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or nonrenewal. Vehicle manufacturers’ lobbying efforts may lead to the repeal or revision of state motor vehicle dealer laws. If motor vehicle dealer laws are repealed or amended in the states in which we operate dealerships, the manufacturers we represent may be able to terminate our vehicle dealership agreements without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, or if such laws are weakened, we will be subject to higher risk of termination or nonrenewal of our vehicle dealership agreements. Termination or nonrenewal of our vehicle dealership agreements would have a material adverse effect on our operations, revenues and profitability.

 

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

 

Our business requires new and used commercial vehicle inventories held for sale to be maintained at dealer locations in order to facilitate immediate sales to customers on demand. We generally purchase new and used commercial vehicle inventories with the assistance of floor plan financing agreements. Our primary floor plan financing agreement, the Floor Plan Credit Agreement, expires on June 30, 2022, and may be terminated without cause upon 120 days’ notice. In the event that our floor plan financing becomes insufficient to satisfy our future requirements or our floor plan providers are unable to continue to extend credit under our floor plan agreements, we would need to obtain similar financing from other sources. There is no assurance that such additional floor plan financing or alternate financing could be obtained on commercially reasonable terms.

 

Changes in interest rates could have a material adverse effect on our profitability. 

 

Our Floor Plan Credit Agreement and some of our other debt are subject to variable interest rates. Therefore, our interest expense would rise with any increase in interest rates. Currently, our outstanding borrowings under our Floor Plan Credit Agreement and certain other loan agreements are borrowed at LIBOR plus an applicable margin. The U.K. Financial Conduct Authority has announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect our results of operations or financial conditions. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere, including the potential impact to our Floor Plan Credit Agreement. However, any rise in interest rates generally may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used commercial vehicle sales, because many of our customers finance such purchases. As a result, a rise in interest rates may have the effect of simultaneously increasing our costs and reducing our revenues, which could materially affect our business, financial condition and results of operations. See “Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our interest rate sensitivity.

 

Impairment in the carrying value of goodwill and other indefinite-lived intangible assets could negatively affect our operating results.

 

We have a substantial amount of goodwill on our balance sheet as a result of acquisitions we have completed. Approximately 99% of this goodwill is concentrated in our Truck Segment. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. Goodwill is not amortized, but instead is evaluated for impairment at least annually, or more frequently if potential interim indicators exist that could result in impairment. In testing for impairment, if the carrying value of a reporting unit exceeds its current fair value as determined based on the discounted future cash flows of the reporting unit, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include weak economic activity, adverse changes in the regulatory environment, any matters that impact the ability of the manufacturers we represent to provide us with commercial vehicles or parts, issues with our franchise rights, or other factors leading to reductions in expected long-term sales or profitability. Determination of the fair value of a reporting unit includes developing estimates that are highly subjective and incorporate calculations that are sensitive to minor changes in underlying assumptions. Changes in these assumptions or a change in the Company’s reportable segments could result in an impairment charge in the future, which could have a significant adverse impact on our reported earnings.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Goodwill” for more information regarding the potential impact of changes in assumptions.

 

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Our business is subject to a number of economic risks.

 

New and used commercial vehicle retail sales tend to experience periods of decline when general economic conditions worsen. We may experience sustained periods of decreased commercial vehicle sales in the future. Any decline or change of this type could materially affect our business, financial condition and results of operations. In addition, adverse regional economic and competitive conditions in the geographic markets in which we operate could materially adversely affect our business, financial condition and results of operations. Our commercial vehicle sales volume therefore may differ from industry sales fluctuations.

 

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

 

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

 

We depend on the manufacturers we represent and component suppliers for sales incentives, discounts, warranties and other programs that are intended to promote the sales of their commercial vehicles or our use of their components in the vehicles we sell. Most of the incentives and discounts are individually negotiated and not always the same as those made available to commercial vehicle manufacturers or our competitors. These incentives and discounts are material to our operations. A reduction or discontinuation of a commercial vehicle manufacturer’s or component supplier’s incentive program could have a material adverse effect on our profitability.

 

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

 

The success of each of our dealerships is dependent on the manufacturers represented at each dealership. Our ability to sell new vehicles that satisfy our customers’ demands and replacement parts is dependent on the ability of the manufacturers we represent to produce and deliver new vehicles and replacement parts to our dealerships. Additionally, our dealerships perform warranty work for vehicles under manufacturer product warranties, which are billed to the appropriate vehicle manufacturer or component supplier as opposed to invoicing our customer. We generally have significant receivables from vehicle manufacturers and component suppliers for warranty and service work performed for our customers. In addition, we rely on vehicle manufacturers and component suppliers to varying extents for product training, marketing materials, and other items for our stores. Our business, results of operations, and financial condition could be materially adversely affected as a result of any event that has a material adverse effect on the vehicle manufacturers or component suppliers we represent.

 

The manufacturers we represent may be adversely impacted by economic downturns, significant declines in the sales of their new vehicles, labor strikes or similar disruptions (including within their major suppliers), rising raw materials costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products (including due to bankruptcy), product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, governmental laws and regulations, or other adverse events. Our results of operations, financial condition or cash flows could be adversely affected if one or more of the manufacturers we represent are impacted by any of the foregoing adverse events.

 

Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could have a material adverse effect on our sales volumes and profitability. In addition, such actions could lead to the impairment of one or more of our franchise rights, inventories, fixed assets and other related assets, which in turn could have a material adverse effect on our financial condition and results of operations. Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could also eliminate or reduce such manufacturers’ indemnification obligations to our dealerships, which could increase our risk in products liability actions.

 

20

 

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

 

As of December 31, 2019, our backlog of new commercial vehicle orders was approximately $1,236.5 million. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We only include confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog.

 

Reductions in backlog due to cancellation by a customer or for other reasons will adversely affect, potentially to a material extent, the revenue and profit we actually receive from orders projected in our backlog. If we were to experience significant cancellations of orders in our backlog, our financial condition could be adversely affected.

 

Our growth strategies may be unsuccessful if we are unable to successfully execute our strategic initiatives or identify and complete future acquisitions.

 

Over the past few years, we have spent significant resources and efforts attempting to grow and enhance our Aftermarket Products and Services business and increase profitability through new business process management initiatives.  These efforts require timely and continued investment in technology, facilities, personnel and financial and management systems and controls.  We may not be successful in implementing all of the processes that are necessary to support any of our growth initiatives, which could result in our expenses increasing disproportionately to our incremental revenues, causing our operating margins and profitability to be adversely affected.

 

Historically, we have achieved a significant portion of our growth through acquisitions and we will continue to consider potential acquisitions on a selective basis.  There can be no assurance that we will be able to identify suitable acquisition opportunities in the future or that we will be able to consummate any such transactions on terms and conditions acceptable to us.  Moreover, there can be no assurance that we will obtain manufacturers’ consents to acquisitions of additional franchises.

 

Our dealerships are subject to federal, state and local environmental regulations that may result in claims and liabilities, which could be material.

 

We are subject to 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 contamination. As with commercial vehicle dealerships generally, and 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. Any non-compliance with these laws and regulations could result in significant fines, penalties and remediation costs which could adversely affect our results of operations, financial condition or cash flows.

 

We may also have liability in connection with materials that were sent to third party recycling, treatment, or disposal facilities under federal and state statutes. Applicable laws may make us responsible for liability relating to the investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. In connection with our acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with dispositions of businesses, or dispositions previously made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material.

 

Further, environmental laws and regulations are complex and subject to change. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us which could materially adversely affect our results of operations, financial condition or cash flows.

 

21

 

Disruptions to our information technology systems and breaches in data or system security could adversely affect our business.

 

We rely upon our information technology systems to manage all aspects of our business, including processing and recording sales to, and payments from, customers, managing inventory, communicating with manufacturers and vendors, processing employee payroll and benefits and financial reporting. Any inability to manage these systems, including with respect to matters related to system and data security, privacy, reliability, compliance, performance and access, as well as any inability of these systems to fulfill their intended purpose within our business, could have an adverse effect on our business. In addition, in the ordinary course of business, we collect and store sensitive data and information, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our employees and customers. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to cyberattacks and other security breaches, computer viruses, lost or misplaced data, programming errors, human errors or other events, and such incidents can remain undetected for a period of time despite our best efforts to detect and respond to them in a timely manner. We routinely monitor our systems for cyber threats and have processes in place to detect and remediate vulnerabilities. Nevertheless, we have experienced occasional cyberattacks and attempted breaches, including phishing emails and ransomware infections. We detected and remediated all of these incidents, all of which we categorized as “commodity threats,” or general attacks common to companies connected to the internet and communicating via email. No known leakage of financial, technical or customer data occurred and none of the incidents had a material adverse effect on our business, operations, reputation, or consolidated results of operations or consolidated financial condition.

 

Any cyberattack, security breach or other event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information of personal identifiable information of employees or customers, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors and employees and result in litigation or regulatory actions, all of which could have a material adverse effect on our business and reputation.

 

We are exposed to a variety of claims relating to our business and the liability associated with such claims may exceed the level of our insurance coverage.

 

In the course of our business, we are exposed to claims for personal injury, death or property damage resulting from: (i) our customers’ use of commercial vehicles that we sell, service, lease or rent; (ii) our customers’ purchase of other products that we design, manufacture, sell or install, such as commercial vehicle parts, custom vehicle modifications and CNG fuel tank systems; and (iii) injuries caused by motor vehicle accidents that our service or delivery personnel are involved in. In addition, we have employees who work remotely from time to time at certain customers’ locations that are considered inherently dangerous, such as oil or gas well drilling sites, commercial construction sites and manufacturing facilities. We could also be subject to potential litigation associated with compliance with various laws and governmental regulations at the federal, state or local levels, such as those relating to vehicle and highway safety, health and workplace safety, security and employment-related claims.

 

We carry comprehensive liability insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims. However, we may be exposed to claims for which coverage is not afforded or the damages exceed the limits of our insurance coverage or multiple claims causing us to incur significant out-of-pocket costs before reaching the deductible amount, all of which could adversely affect our financial condition and results of operations. In addition, the cost of such insurance policies may increase significantly upon renewal of those policies as a result of general rate increases for the type of insurance we carry as well as our historical experience and experience in our industry. Although we have not experienced any material losses that were not covered by insurance, our existing or future claims may exceed the coverage level of our insurance, and such insurance may not continue to be available on economically reasonable terms, or at all. If we are required to pay significantly higher premiums for insurance, are not able to maintain insurance coverage at affordable rates or if we must pay amounts in excess of claims covered by our insurance, we could experience higher costs that could adversely affect our financial condition and results of operations.

 

Technological advances in the commercial vehicle industry, including drivetrain electrification or other alternative fuel technologies, in the long-term could have a material adverse effect on our business.

 

The commercial vehicle industry is predicted to experience change over the long-term.  Technological advances, including with respect to drivetrain electrification or other alternative fuel technologies, could potentially have a material adverse effect on our parts and service business, as such vehicles are currently being described as potentially requiring less service and having fewer parts.  The effect of these technological advances on our business is uncertain, as there are many factors that are unknowable at this time, including when such vehicles may be commercially available at price points that would lead to their widespread adoption.  Similarly, although we are aware of ongoing efforts to facilitate the development of driverless commercial vehicles, the eventual timing of the availability of driverless commercial vehicles is uncertain due to regulatory requirements and additional technological requirements.  The effect of driverless commercial vehicles on the commercial vehicle industry is uncertain and could include changes in the level of new and used commercial vehicles sales, the price of new commercial vehicles, and the role of franchised dealers, any of which could materially adversely affect our business, financial condition and results of operations. 

 

22

 

Natural disasters and adverse weather events can disrupt our business. 

 

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

 

Risks Related to Our Common Stock

 

We are controlled by two shareholders and their affiliates.

 

Collectively, the estate of W. Marvin Rush and W. M. “Rusty” Rush and their affiliates own approximately 0.7% of our issued and outstanding shares of Class A Common Stock and 45.9% of our issued and outstanding Class B Common Stock. The estate of W. Marvin Rush and W.M. “Rusty” Rush collectively control approximately 37.4% of the aggregate voting power of our outstanding shares and voting power, which is substantially more than any other person or group. The interests of the estate of W. Marvin Rush and W.M. “Rusty” Rush may not be consistent with the interests of all shareholders, or each other. As a result of such ownership, the estate of W. Marvin Rush and W.M. “Rusty” Rush have the power to effectively control the Company, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance.

 

Our dealership agreements could discourage another company from acquiring us.

 

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

 

Additionally, W. Marvin Rush and W.M. “Rusty” Rush granted Peterbilt a right of first refusal to purchase their respective shares of common stock in the event that they desire to transfer in excess of 100,000 shares in any 12-month period to any person other than an immediate family member, an associate or another Dealer Principal. However, in the case of the estate of W. Marvin Rush, certain shares of his Class B Common Stock of the Company are exempt from his rights of first refusal agreement. These rights of first refusal, the number of shares owned by the estate of W. Marvin Rush and W.M. “Rusty” Rush and their affiliates, the requirement in our dealership agreements that the Dealer Principals retain a controlling interest in us and the restrictions on the sale or transfer of our franchises contained in our dealer agreements, combined with the ability of the Board of Directors to issue shares of preferred stock without further vote or action by the shareholders, may discourage, delay or prevent a change in control without further action by our shareholders, which could adversely affect the market price of our common stock or prevent or delay a merger or acquisition that our shareholders may consider favorable.

 

Actions by our shareholders or prospective shareholders that would violate any of the above restrictions on our dealership agreements are generally outside of our control. If we are unable to renegotiate these restrictions, we may be forced to terminate or sell one or more of our dealerships, which could have a material adverse effect on us. These restrictions may also inhibit our ability to raise required capital or to issue our stock as consideration for future acquisitions.

 

Class A Common Stock has limited voting power.

 

Each share of Class A Common Stock ranks substantially equal to each share of Class B Common Stock with respect to receipt of any dividends or distributions declared on shares of common stock and the right to receive proceeds on liquidation or dissolution of us after payment of our indebtedness and liquidation preference payments to holders of any preferred shares. However, holders of Class A Common Stock have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of Class B Common Stock have one full vote per share.

 

23

 

Our Class B Common Stock has a low average daily trading volume. As a result, sales of our Class B Common Stock could cause the market price of our Class B Common Stock to drop, and it may be difficult for a stockholder to liquidate its position in our Class B Common Stock quickly without adversely affecting the market price of such shares.

 

The volume of trading in our Class B Common Stock varies greatly and may often be light. As of December 31, 2019, the three-month average daily trading volume of our Class B Common Stock was approximately 7,600 shares, with twenty-seven days having a trading volume below 5,000 shares. If any large shareholder were to begin selling shares in the market, the added available supply of shares could cause the market price of our Class B Common Stock to drop. In addition, the lack of a robust resale market may require a shareholder to sell a large number of shares of our Class B Common Stock in increments over time to mitigate any adverse impact of the sales on the market price of our Class B Common Stock.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.   Properties

 

Our corporate headquarters are located in New Braunfels, Texas. As of December 2019, we also own or lease numerous facilities used in our operations in the following states: Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Missouri, New Mexico, Nebraska, Nevada, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah and Virginia.

 

We lease a hangar in New Braunfels, Texas for the corporate aircraft. We also own and operate a guest ranch of approximately 9,500 acres near Cotulla, Texas, which is used for client development purposes.

 

Item 3.   Legal Proceedings

 

From time to time, we are involved in litigation arising out of our operations in the ordinary course of business. We maintain liability insurance, including product liability coverage, in amounts deemed adequate by management. To date, aggregate costs to us for claims, including product liability actions, have not been material. However, an uninsured or partially insured claim, or claim for which indemnification is not available, could have a material adverse effect on our financial condition or results of operations. We believe that there are no claims or litigation pending, the outcome of which could have a material adverse effect on our 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 our financial condition or results of operations for the fiscal period in which such resolution occurred.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

24

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

 

Our common stock trades on The NASDAQ Global Select MarketSM under the symbols RUSHA and RUSHB. During 2019, our Board of Directors approved four quarterly cash dividends on all outstanding shares of common stock totaling $0.50 per share. We expect to continue paying cash dividends on a quarterly basis. However, there is no assurance as to the payment of future dividends because the declaration and payment of such dividends is subject to the business judgment of our Board of Directors and will depend on historic and projected earnings, capital requirements, covenant compliance, financial conditions and such other factors as the Board of Directors deems relevant.

 

The following table sets forth the high and low sales prices for our Class A Common Stock and Class B Common Stock for the fiscal periods indicated and as quoted on The NASDAQ Global Select MarketSM and dividends declared.

 

   

2019

   

2018

 
   

Dividends

Declared

   

High

   

Low

   

Dividends

Declared

   

High

   

Low

 

Class A Common Stock

                                               
                                                 

First Quarter

  $ .12     $ 44.28     $ 33.81     $     $ 55.40     $ 39.58  

Second Quarter

    .12       45.99       34.72             46.66       37.95  

Third Quarter

    .13       41.92       33.73       .12       46.22       38.73  

Fourth Quarter

    .13       49.27       34.81       .12       39.92       31.53  
                                                 

Class B Common Stock

                                               
                                                 

First Quarter

  $ .12     $ 44.43     $ 35.03     $     $ 52.76     $ 37.23  

Second Quarter

    .12       45.51       35.52             46.75       36.61  

Third Quarter

    .13       43.85       35.20       .12       46.99       39.45  

Fourth Quarter

    .13       48.50       36.68       .12       40.38       32.35  

 

As of February 10, 2020, there were approximately 20 record holders of Class A Common Stock and approximately 27 record holders of Class B Common Stock.

 

As of December 31, 2019, we have not sold any securities in the last three years that were not registered under the Securities Act.

 

A summary of our stock repurchase activity for the fourth quarter of 2019 is as follows:

 

Period

 

Total

Number of

Shares

Purchased

(1)(2)(3)

   

 

Average

Price Paid

Per Share

(1)

   

Total Number of

Shares Purchased

as Part of

Publicly

Announced Plans

or Programs (2)

   

Approximate

Dollar Value of

Shares that May

Yet be Purchased

Under the Plans

or Programs (3)

 

October 1 – October 31, 2019

    82,145     $ 38.02  (4)     82,145     $ 26,809,509  

November 1 – November 30, 2019

    10,609       42.83  (5)     10,609       26,354,772  

December 1 – December 31, 2019

    10,808       46.98  (6)     10,808       99,491,935  

Total

    103,562               103,562          

 

(1)

The calculation of the average price paid per share does not give effect to any fees, commissions or other costs associated with the repurchase of such shares.

(2)

The shares represent Class A and Class B Common Stock repurchased by us.

(3)

We repurchased shares in 2019 under a stock repurchase program announced on October 31, 2018, which authorized the repurchase of up to $150.0 million of our shares of Class A Common Stock and/or Class B Common Stock. This plan was terminated effective November 30, 2019; we repurchased $123.6 million shares of our Class A and Class B Common Stock under the plan prior to its termination. On December 3, 2019, we announced the approval of a new stock repurchase program authorizing management to repurchase, from time to time, up to an aggregate of $100.0 million of our shares of Class A Common Stock and/or Class B Common Stock. The current stock repurchase program expires on December 31, 2020, and may be suspended or discontinued at any time.

(4)

Represents 60,132 shares of Class A Common Stock at an average price paid per share of $37.73 and 22,013 shares of Class B Common Stock at an average price paid per share of $38.80.

(5)

Represents 10,609 shares of Class B Common Stock at an average price paid per share of $42.83.

(6)

Represents 10,808 shares of Class B Common Stock at an average price paid per share of $46.98.

 

25

 

Information regarding our equity compensation plans is incorporated by reference from Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters,” of this annual report on Form 10-K and should be considered an integral part of this Item 5.

 

Performance Graph

 

The following graph shows the cumulative 5-Year total return as of December 31, 2019, of a $100 investment in the Company’s common stock made on December 31, 2014 (with dividends reinvested), as compared with similar investments based on (i) the cumulative total returns of the S&P 500 Index (with dividends reinvested) and (ii) the cumulative total returns of a market-weighted Peer Group Index composed of the common stock of PACCAR, Inc., Werner Enterprises, Inc., Penske Automotive Group, Inc. and Lithia Motors, Inc., assuming reinvestment of dividends. The market-weighted Peer Group Index values were calculated from the beginning of the performance period. The historical stock price performance shown below is not necessarily indicative of future stock price performance.

 

 

   

December 31,

 
   

2014

   

2015

   

2016

   

2017

   

2018

   

2019

 

Rush Enterprises, Inc.

  $ 100.00     $ 72.73     $ 104.25     $ 164.46     $ 117.08     $ 155.90  

S&P 500

    100.00       101.38       113.51       138.29       132.23       173.86  

Peer Group

    100.00       78.29       101.99       116.40       96.60       140.79  

 

The foregoing performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

26

 

Item 6.    Selected Financial Data

 

The information below was derived from the audited consolidated financial statements included in this report and reports we have previously filed with the SEC. This information should be read together with those consolidated financial statements and the notes to those consolidated financial statements. These historical results are not necessarily indicative of the results to be expected in the future. The selected financial data presented below may not be comparable between periods in all material respects or indicative of our future financial position or results of operations due primarily to acquisitions which occurred during the periods presented. See Note 15 to the Company’s Consolidated Financial Statements for a discussion of such acquisitions. The selected financial data presented below should be read in conjunction with our other financial information included elsewhere herein.

 

   

Year Ended December 31,

 
   

2019

   

2018

   

2017

   

2016

   

2015

 

 

 

(in thousands, except per share amounts)

 
SUMMARY OF INCOME STATEMENT DATA                                        

Revenues

                                       

New and used commercial vehicle sales

  $ 3,757,584     $ 3,558,637     $ 2,993,015     $ 2,640,019     $ 3,360,808  

Aftermarket products and services sales

    1,762,510       1,670,052       1,471,266       1,332,356       1,382,447  

Lease and rental

    247,549       238,238       217,356       208,154       199,867  

Finance and insurance

    24,443       20,535       17,988       18,582       21,150  

Other

    17,761       18,728       14,257       15,503       15,461  

Total revenues

    5,809,847       5,506,190       4,713,882       4,214,614       4,979,733  

Cost of products sold

    4,784,219       4,527,921       3,883,946       3,496,602       4,194,786  

Gross profit

    1,025,628       978,269       829,936       718,012       784,947  

Selling, general and administrative

    753,749       705,226       631,053       587,778       619,268  

Depreciation and amortization

    55,372       70,489       50,069       51,261       43,859  

(Loss) gain on sale of assets

    (102 )     297       (105 )     1,755       (544 )

Operating income

    216,405       202,851       148,709       80,728       121,276  

Other income

    1,925                          

Interest expense, net

    28,807       19,682       12,310       14,279       13,473  

Income before income taxes

    189,523       183,169       136,399       66,449       107,803  

Provision (benefit) for income taxes

    47,940       44,107       (35,730 )     25,867       41,750  

Net income

  $ 141,583     $ 139,062     $ 172,129     $ 40,582     $ 66,053  
                                         

Net income per common share:

                                       

Basic

  $ 3.86     $ 3.55     $ 4.34     $ 1.02     $ 1.64  

Diluted

  $ 3.77     $ 3.45     $ 4.20     $ 1.00     $ 1.61  
                                         

Cash dividends declared per share

  $ 0.50     $ 0.24                    
                                         

Weighted average shares outstanding:

                                       

Basic

    36,659       39,223       39,627       39,938       40,271  

Diluted

    37,571       40,293       40,980       40,603       41,093  

 

27

 

   

Year Ended December 31,

 
   

2019

   

2018

   

2017

   

2016

   

2015

 

OPERATING DATA

                                       

Unit vehicle sales −

                                       

New vehicles

    31,675       29,776       25,696       23,627       29,780  

Used vehicles

    7,741       8,021       7,060       7,008       7,922  

Total unit vehicles sales

    39,416       37,797       32,756       30,635       37,702  

Commercial vehicle lease and rental units

    8,506       8,092       7,993       7,841       7,800  

 

   

December 31,

 
   

2019

   

2018

   

2017

   

2016

   

2015

 
   

(in thousands)

 

BALANCE SHEET DATA

                                       

Working capital

  $ 205,162     $ 194,649     $ 202,891     $ 118,318     $ 79,549  

Inventories

    1,326,080       1,339,923       1,033,294       840,304       1,061,198  

Total assets

    3,407,329       3,201,350       2,890,139       2,603,047       2,852,008  
                                         

Floor plan notes payable

    996,336       1,023,019       778,561       646,945       854,758  

Long-term debt, including current portion

    627,678       601,173       611,528       604,003       647,755  

Finance lease obligations, including current portion

    92,370       69,114       83,141       84,493       83,765  

Total shareholders’ equity

    1,159,493       1,066,928       1,040,373       862,825       844,897  

 

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

 

Overview

 

We are a full-service, integrated retailer of commercial vehicles and related services. We operate one segment - the Truck Segment. The Truck Segment operates a network of commercial vehicle dealerships primarily under the name “Rush Truck Centers.” Most Rush Truck Centers are a franchised dealer for commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, FUSO, 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. We offer an integrated approach to meeting customer needs by providing service, parts and collision repair in addition to new and used commercial vehicle sales and leasing, insurance and financial services, vehicle upfitting, CNG fuel systems and vehicle telematics products. 

 

Our goal is to continue to serve as the premier service solutions provider to the end-users of commercial vehicles. Our strategic efforts to achieve this goal include continuously expanding our portfolio of Aftermarket Products and Services, broadening the diversity of our commercial vehicle product offerings and extending our network of Rush Truck Centers. Our commitment to provide innovative solutions to service our customers’ needs continues to drive our strong Aftermarket Products and Services revenues.

 

Our Aftermarket Products and Services include a wide range of capabilities and products such as providing parts, service and collision repairs at certain of our Rush Truck Centers, a fleet of mobile service units, technicians who work in our customers’ facilities, a proprietary line of commercial vehicle parts and accessories, vehicle upfitting, a broad range of diagnostic and analysis capabilities, a suite of telematics products and assembly services for specialized bodies and equipment. Aftermarket Products and Services accounted for 64.9% of our total gross profits in 2019.

 

Summary of 2019

 

Our results of operations for the year ended December 31, 2019 are summarized below as follows:

 

 

Our gross revenues totaled $5,809.8 million in 2019, a 5.5% increase from gross revenues of $5,506.2 million in 2018.

 

 

Gross profit increased $47.4 million, or 4.8%, in 2019, compared to 2018. Gross profit as a percentage of sales decreased to 17.7% in 2019, from 17.8% in 2018.

 

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Our 2019 new Class 8 heavy-duty unit sales, which accounted for 5.3% of the total U.S. market, increased 2.2% in 2019, compared to 2018.

 

 

Our 2019 new Class 4-7 medium-duty unit sales, including buses, which accounted for 5.4% of the total U.S. market, increased 11.7% in 2019, compared to 2018. New light-duty truck unit sales increased 2.7% in 2019, compared to 2018.

 

 

Aftermarket Products and Services revenues increased $92.5 million, or 5.5%, to $1,762.5 million in 2019, compared to $1,670.1 million in 2018.

 

 

Selling, General and Administrative expenses increased $48.5 million, or 6.9%, to $753.7 million in 2019, compared to $705.2 million in 2018.

 

 

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 currently operates a network of 14 International Truck full-service dealerships throughout the Province of Ontario. We have a call option to purchase the remaining 50% equity interest that expires on February 25, 2024.

 

2020 Outlook

 

According to A.C.T. Research Co., LLC (“A.C.T. Research”), a commercial vehicle industry data and forecasting service provider, new U. S. Class 8 truck retail sales are estimated to total 190,000 truck units in 2020, a 32.5% decrease compared to 281,440 units sold in 2019. We expect our market share of new Class 8 truck sales to range between 6.0% and 6.5% in 2020. This market share percentage would result in the sale of approximately 11,400 to 12,350 of new Class 8 trucks in 2020, based on A.C.T. Research’s current U.S. retail sales estimate of 190,000 units.

 

According to A.C.T. Research, new U. S. Class 4 through 7 commercial vehicle retail sales are estimated to total 253,400 units in 2020, a 5.1% decrease compared to 266,977 units sold in 2019. We expect our market share of new Class 4 through 7 commercial vehicle sales to range between 5.1% and 5.5% in 2020. This market share percentage would result in the sale of approximately 13,000 to 14,000 of new Class 4 through 7 commercial vehicles in 2020, based on A.C.T. Research’s current U.S. retail sales estimates of 253,400 units.

 

We expect to sell approximately 2,200 light-duty vehicles and approximately 7,900 to 8,300 used commercial vehicles in 2020. We expect lease and rental revenue to increase 5% to 10% during 2020, compared to 2019.

 

We continue to make progress on our strategic initiatives to increase our Aftermarket Products and Services revenues.  We believe our Aftermarket Products and Services revenues will increase 1% to 3% in 2020, compared to 2019.

 

Key Performance Indicator

 

Absorption Ratio. 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 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 120.2% absorption ratio for the year ended December 31, 2019 and 122.4% absorption ratio for the year ended December 31, 2018.

 

29

 

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 the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. We believe the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

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.

 

Goodwill

 

Goodwill is tested for impairment by reporting unit utilizing a two-step process at least annually, or more frequently when events or changes in circumstances indicate that the asset might be impaired. The first step requires us to compare the fair value of the reporting unit (we consider our Truck Segment to be a reporting unit for purposes of this analysis), which is the same as the segment, to the respective carrying value. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is greater than the fair value, there is an indication that impairment may exist and a second step is required. In the second step of the analysis, the implied fair value of the goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment loss.

 

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

 

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we used to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, or certain events occur that might adversely affect the reported value of goodwill in the future, we may be exposed to an impairment charge that could be material.

 

Goodwill was tested for impairment during the fourth quarter of 2019 and no impairment was required. The fair value of our reporting unit exceeded the carrying value of its net assets. As a result, we were not required to conduct the second step of the impairment test. We do not believe our reporting unit is at risk of failing step one of the impairment test.

 

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.

 

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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.

 

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 

  

Effective January 1, 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective transition method.  This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.  Under Topic 606, 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 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.  

 

New Accounting Standards

 

In June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which modifies the measurement of expected credit losses of certain financial instruments. Credit losses on trade and other receivables, held-to-maturity debt securities, and other instruments will reflect the Company's current estimate of the expected credit losses and will generally result in the earlier recognition of allowance for losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of, and approach to, adopting this new accounting guidance, and we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

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Results of Operations

 

The following discussion and analysis includes our historical results of operations for 2019, 2018 and 2017. The following table sets forth for the years indicated certain financial data as a percentage of total revenues:

 

   

Year Ended December 31,

 
   

2019

   

2018

   

2017

 

New and used commercial vehicle sales

    64.7

%

    64.6

%

    63.5

%

Aftermarket Products and Services sales

    30.3       30.3       31.2  

Lease and rental

    4.3       4.3       4.6  

Finance and insurance

    0.4       0.4       0.4  

Other

    0.3       0.4       0.3  

Total revenues

    100.0       100.0       100.0  

Cost of products sold

    82.3       82.2       82.4  

Gross profit

    17.7       17.8       17.6  

Selling, general and administrative

    13.0       12.8       13.4  

Depreciation and amortization

    1.0       1.3       1.0  

Gain (loss) on sale of assets

    0.0       0.0       0.0  

Operating income

    3.7       3.7       3.2  

Other income

    0.0       0.0       0.0  

Interest expense, net

    0.5       0.4       0.3  

Income from continuing operations before income taxes

    3.2       3.3       2.9  

Provision (benefit) for income taxes

    0.8       0.8       (0.8 )

Net income

    2.4

%

    2.5

%

    3.7

%

 

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

 

                           

% Change

 
   

2019

   

2018

   

2017

   

2019

vs

2018

   

2018

vs

2017

 

Vehicle unit sales:

                                       

New heavy-duty vehicles

    14,986       14,666       13,083       2.2 %     12.1 %

New medium-duty vehicles

    14,470       12,949       10,952       11.7 %     18.2 %

New light-duty vehicles

    2,219       2,161       1,661       2.7 %     30.1 %

Total new vehicle unit sales

    31,675       29,776       25,696       6.4 %     15.9 %
                                         

Used vehicles sales

    7,741       8,021       7,060       -3.5 %     13.6 %
                                         

Vehicle revenue:

                                       

New heavy-duty vehicles

  $ 2,192.3     $ 2,120.5     $ 1,817.3       3.4 %     16.7 %

New medium-duty vehicles

    1,124.0       971.3       806.5       15.7 %     20.4 %

New light-duty vehicles

    90.6       86.7       64.0       4.5 %     35.5 %

Total new vehicle revenue

  $ 3,406.9     $ 3,178.5     $ 2,687.8       7.2 %     18.3 %
                                         

Used vehicle revenue

  $ 330.3     $ 360.1     $ 291.5       -8.3 %     23.5 %
                                         

Other vehicle revenue:(1)

  $ 20.4     $ 20.0     $ 13.7       2.0 %     46.0 %
                                         

Dealership absorption ratio:

    120.2 %     122.4 %     121.0 %     -1.8 %     1.2 %

 

  (1)

Includes sales of truck bodies, trailers and other new equipment.

 

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The following table sets forth for the periods indicated the percent of gross profit by revenue source:

 

   

2019

   

2018

   

2017

 

Gross Profit:

                       

New and used commercial vehicle sales

    27.0

%

    28.4

%

    27.3

%

Aftermarket Products and Services sales

    64.9       63.4       64.7  

Lease and rental

    4.0       4.2       4.1  

Finance and insurance

    2.4       2.1       2.2  

Other

    1.7       1.9       1.7  

Total gross profit

    100.0

%

    100.0

%

    100.0

%

 

Industry

 

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

 

Heavy-Duty Truck Market

 

The U.S. retail heavy-duty truck market is affected by a number of factors, including general economic conditions, fuel prices, other methods of transportation, environmental and other government regulation, interest rate fluctuations and customer business cycles. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on general economic conditions. According to data published by A.C.T. Research, over the last 10 years, total U.S. retail sales of new Class 8 trucks have ranged from a low of approximately 97,000 in 2009 to a high of approximately 281,440 in 2019. Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds.

 

Typically, Class 8 trucks are assembled by manufacturers utilizing certain components that may be manufactured by other companies, including engines, transmissions, axles, wheels and other components. As commercial vehicles and certain commercial vehicle components have become increasingly complex, the ability to provide service for commercial vehicles has become an increasingly competitive factor in the industry. The ability to provide such service requires a significant capital investment in diagnostic and other equipment, parts inventory and highly trained service personnel. EPA and Department of Transportation regulatory guidelines for service processes, including collision center, paint work and waste disposal, require sophisticated equipment to ensure compliance with environmental and safety standards. Differentiation between commercial vehicle dealers has become less dependent on price competition and is increasingly based on a dealer’s ability to offer a wide variety of services to their clients in a timely manner to minimize vehicle downtime. Such services include the following: efficient, conveniently located and easily accessible commercial vehicle service centers with an adequate supply of replacement parts; financing for commercial vehicle purchases; leasing and rental programs; and the ability to accept multiple unit trade-ins related to large fleet purchases. We believe our one-stop center concept and the size and geographic diversity of our dealership network gives us a competitive advantage in providing these services.

 

A.C.T. Research currently estimates approximately 190,000 new Class 8 trucks will be sold in the United States in 2020, compared to approximately 281,440 new Class 8 trucks sold in 2019. A.C.T. Research currently forecasts sales of new Class 8 trucks in the U.S. to be approximately 193,000 in 2021.

 

Medium-Duty Truck Market

 

Many of our Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, International, Hino, Ford, FUSO or Isuzu, and provide parts and service for medium-duty commercial vehicles. Medium-duty commercial vehicles are principally used in short-haul, local markets as delivery vehicles; they typically operate locally and generally do not leave their service areas overnight. We also sell light-duty vehicles (Class 3 and under) at several of our Ford dealerships.

 

A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 253,400 units in 2020, compared to 266,977 units in 2019. A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 252,800 in 2021.

 

33

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Revenues

 

Total revenues increased $303.7 million, or 5.5%, in 2019, compared to 2018.

 

Our Aftermarket Products and Services revenues increased $92.5 million, or 5.5%, in 2019, compared to 2018. This increase was primarily due to continued growth of our all-makes parts product offerings, investment in internal and customer-facing technologies and increases to our aftermarket sales force.

 

Our revenues from sales of new and used commercial vehicles increased $198.9 million, or 5.6%, in 2019, compared to 2018. Our commercial vehicle sales increased steadily in the first three quarters of 2019 primarily due to a healthy economy and strong activity across the market segments that we support, and in particular, our vocational customers.

 

We sold 14,986 new heavy-duty trucks in 2019, a 2.2% increase compared to 14,666 new heavy-duty trucks in 2018. Our new heavy-duty truck sales in 2019 increased due to strong activity across the industries that we support. Our share of the new U.S. Class 8 commercial vehicle sales market decreased to approximately 5.3% in 2019, from 5.7% in 2018. In a robust Class 8 truck market, our market share historically declines.

 

We sold 14,470 new medium-duty commercial vehicles, including 1,272 buses, in 2019, an 11.7% increase compared to 12,949 new medium-duty commercial vehicles, including 1,453 buses, in 2018. This increase was primarily the result of the wide range of medium-duty commercial vehicles we offer, as well as strong growth in the market segments on which we focus, and in particular, construction. In 2019, we achieved a 5.4% share of the Class 4 through 7 commercial vehicle market in the U.S.

 

We sold 2,219 new light-duty vehicles in 2019, a 2.7% increase compared to 2,161 new light-duty vehicles in 2018.

 

We sold 7,741 used commercial vehicles in 2019, a 3.5% decrease compared to 8,021 used commercial vehicles in 2018.

 

Commercial vehicle lease and rental revenues increased $9.3 million, or 3.9%, in 2019, compared to 2018. This increase was primarily related to increased utilization of the rental fleet and the increase in the number of units in the lease in rental fleet compared to 2018.

 

Finance and insurance revenues increased $3.9 million, or 19.0%, in 2019, compared to 2018. We expect finance and insurance revenue to fluctuate proportionately with our new and used commercial vehicle sales in 2020. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.

 

Other revenues decreased $1.0 million, or 5.2% in 2019, compared to 2018. Other revenues consist primarily of document fees related to commercial vehicle sales.

 

Gross Profit

 

Gross profit increased $47.4 million, or 4.8%, in 2019, compared to 2018. Gross profit as a percentage of sales decreased to 17.7% in 2019, from 17.8% in 2018.

 

Gross margins from our Aftermarket Products and Services operations increased to 37.7% in 2019, from 37.1% in 2018. Gross profit for Aftermarket Products and Services increased to $665.2 million in 2019, from $620.4 million in 2018. Historically, parts operations’ gross margins range from 27% to 29% and service and collision center operations range from 66% to 68%. Gross profits from parts sales represented 59.3% of total gross profit for Aftermarket Products and Services operations in 2019 and 58.4% in 2018. Service and collision center operations represented 40.7% of total gross profit for Aftermarket Products and Services operations in 2019 and 41.6% 2018. We expect blended gross margins on Aftermarket Products and Services operations to range from 37.0% to 38.0% in 2020.

 

Gross margins on new heavy-duty truck sales increased to 8.1% in 2019, from 7.9% in 2018. In 2020, we expect overall gross margins from new heavy-duty truck sales of approximately 7.0% to 8.0%.

 

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Gross margins on new medium-duty commercial vehicle sales decreased to 5.7% in 2019, from 5.9% in 2018. For 2020, we expect overall gross margins from new medium-duty commercial vehicle sales of approximately 5.0% to 6.0%, but this will largely depend upon the mix of purchasers and types of vehicles sold.

 

Gross margins on used commercial vehicle sales decreased to 8.9% in 2019, from 12.0% in 2018. This decrease is primarily due to increased supply 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 2020.

 

Gross margins from commercial vehicle lease and rental sales decreased to 16.7% in 2019, from 17.2% in 2018. We expect gross margins from lease and rental sales of approximately 16.5% to 17.5% during 2020. 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.

 

Finance and insurance revenues and other revenues, 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 $48.5 million, or 6.9%, in 2019, compared to 2018. This increase is primarily related to increased commissions resulting from increased sales of commercial vehicles and Aftermarket Products and Services. SG&A expenses as a percentage of total revenues increased to 13.0% in 2019, from 12.8% in 2018. Annual SG&A expenses as a percentage of total revenues have ranged from 12.4% to 13.9% over the last five years. In general, when new and used commercial vehicle revenues increase as a percentage of total revenues, SG&A expenses as a percentage of total revenues will be at the lower end of this range. For 2020, we expect SG&A expenses as a percentage of total revenues to range from 13.5% to 14.0% 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

 

Depreciation and amortization expense decreased $15.1 million, or 21.4%, in 2019, compared to 2018. This decrease is primarily related to the additional amortization expense related to the replacement of our enterprise resource planning software platform components in 2018.

 

Interest Expense, Net

 

Net interest expense increased $9.1 million, or 46.4%, in 2019, compared to 2018. This increase is a result of increased inventory levels throughout 2019, compared to 2018. We expect net interest expense in 2020 to decrease, but the amount of the decrease will depend on inventory levels, interest rate fluctuations and the amount of cash available to make prepayments on our floor plan arrangements.

 

Income before Income Taxes

 

Income before income taxes increased $6.4 million, or 3.5%, in 2019, compared to 2018, as a result of the factors described above.

 

Income Taxes

 

Income tax expense increased $3.8 million, or 8.7%, in 2019, compared to 2018, as a result of the factors described above.

 

We provided for taxes at a 25.3% effective rate in 2019, compared to an effective rate of 24.2% in 2018. We expect our effective tax rate to be approximately 25.0% to 26.0% of pretax income in 2020.

 

35

 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

 

For a discussion of information on the year ended December 31, 2017, refer to Part II, Item 7 in the 2018 Annual Report on Form 10-K.   https://www.sec.gov/Archives/edgar/data/1012019/000143774919003282/rusha20181231_10k.htm

  

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 December 31, 2019, we had working capital of approximately $205.2 million, including $181.6 million in cash, available to fund our operations. We believe that these funds, together with expected cash flows from operations, are sufficient to meet our operating requirements for at least the next twelve months. From time to time, we utilize our excess cash on hand to pay down our outstanding borrowings under our Floor Plan Credit Agreement with BMO Harris, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement.

 

We have a secured line of credit that provides for a maximum borrowing of $17.5 million. There were no advances outstanding under this secured line of credit on December 31, 2019, however, $11.6 million was pledged to secure various letters of credit related to self-insurance products, leaving $5.9 million available for future borrowings as of December 31, 2019.

 

We have a working capital facility (“the Working Capital Facility”) with BMO Harris that includes up to $100 million of revolving credit loans available to us for working capital, capital expenditures and other general corporate purposes. The amount of the borrowings under the Working Capital Facility are subject to borrowing base limitations based on the value of our eligible parts inventory and company vehicles. The Working Capital Facility includes a $20 million letter of credit sublimit. Borrowings under the Working Capital Facility bear interest at rates based on LIBOR or the Base Rate (as such terms are defined in the Working Capital Facility), plus an applicable margin determined based on outstanding borrowing under the Working Capital Facility. In addition, we are required to pay a commitment fee on the amount unused under the Working Capital Facility. The Working Capital Facility expires on the earlier of (i) March 21, 2020 and (ii) the date on which all commitments under the Working Capital Facility shall have terminated, whether as a result of the occurrence of the Commitment Termination Date (as defined in the Working Capital Facility) or otherwise. There were no advances outstanding under the Working Capital Facility as of December 31, 2019.

 

Our long-term real estate debt, floor plan financing agreements and the Working Capital Facility require us to satisfy various financial ratios such as the debt-to-worth ratio, leverage ratio and the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. As of December 31, 2019, we were in compliance with all debt covenants related to debt secured by real estate, lease and rental units, our floor plan credit agreements and the Working Capital Facility. We do not anticipate any breach of the covenants in the foreseeable future.

 

We expect to purchase or lease commercial vehicles worth approximately $180.0 million to $190.0 million for our leasing operations during 2020, depending on customer demand, all of which will be financed. We also expect to make capital expenditures for recurring items such as computers, shop tools and equipment and vehicles of approximately $30.0 million to $35.0 million during 2020.

 

During the fourth quarter of 2019, we paid a cash dividend of $4.7 million. Additionally, on February 11, 2020, our Board of Directors declared a cash dividend of $0.13 per share of Class A and Class B Common Stock, to be paid on March 17, 2020, to all shareholders of record as of February 25, 2020. The total dividend disbursement is estimated at approximately $4.7 million. We expect to continue paying cash dividends on a quarterly basis. However, there is no assurance as to future dividends because the declaration and payment of such dividends is subject to the business judgment of our Board of Directors and will depend on historic and projected earnings, capital requirements, covenant compliance and financial conditions and such other factors as our Board of Directors deem relevant.

 

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On November 26, 2019, our Board of Directors approved a stock repurchase program authorizing management to repurchase, from time to time, up to an aggregate of $100.0 million of our shares of Class A Common Stock and/or Class B Common Stock. Repurchases, if any, will be made at times and in amounts as we deem appropriate and may be made through open market transactions at prevailing market prices, privately negotiated transactions or by other means in accordance with federal securities laws. The actual timing, number and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including market conditions, stock price and other factors, including those related to the ownership requirements of our dealership agreements with Peterbilt. As of December 31, 2019, we had repurchased $0.5 million of our shares of common stock under the stock repurchase program. The current stock repurchase program expires on December 31, 2020, and may be suspended or discontinued at any time.

 

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 December 31, 2019. However, we will continue to purchase vehicles for our lease and rental division and authorize capital expenditures for improvement and expansion of our existing dealership facilities and construction or purchase of new facilities based on market opportunities.

 

Cash Flows

 

Cash and cash equivalents increased by $49.9 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, and increased by $7.2 million during the year ended December 31, 2018, compared to the year ended December 31, 2017. The major components of these changes are discussed below.

 

Cash Flows from Operating Activities

 

Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. During 2019, operating activities resulted in net cash provided by operations of $421.3 million. Net cash provided by operating activities primarily consisted of $141.6 million in net income, as well as non-cash adjustments related to depreciation and amortization of $175.5 million, deferred income tax of $23.0 million and stock-based compensation of $19.0 million. Cash used in operating activities included an aggregate of $62.1 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $19.8 million from a decrease in accounts receivable, $81.7 million from a decrease in inventory and $6.5 million from the increase in customer deposits, which were offset by cash outflows of $10.5 million from the decreases in accounts payable and accrued liabilities, $26.6 million from the net payments on floor plan (trade) and $7.9 million from the increase in other current assets. The majority of commercial vehicle inventory is financed through our floor plan credit agreements.

 

During 2018, operating activities resulted in net cash provided by operations of $215.4 million. Net cash provided by operating activities primarily consisted of $139.1 million in net income, as well as non-cash adjustments related to depreciation and amortization of $185.1 million, deferred income tax of $6.0 million and stock-based compensation of $18.1 million. Cash used in operating activities included an aggregate of $132.6 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $76.6 million from the net increase in borrowings on floor plan (trade), $42.8 million from the increases in accounts payable and accrued liabilities, $8.8 million from the increase in customer deposits and $1.9 million from the decrease in other current assets, which were offset by cash outflows of $ 7.7 million from an increase in accounts receivable and $255.0 million from the increase in inventory.

 

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 December 31, 2019, the interest rate on the wholesale financing agreement was 6.25% before considering the applicable incentives that we are qualified to receive. As of December 31, 2019, we had an outstanding balance of approximately $115.0 million under the Ford Motor Credit Company wholesale financing agreement.

 

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Cash Flows from Investing Activities

 

During 2019, cash used in investing activities was $320.5 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures. Capital expenditures totaled $293.5 million during 2019 and consisted primarily of purchases of property and equipment, improvements to our existing dealership facilities and $209.3 million for purchases of rental and lease vehicles for the rental and leasing operations, which were directly offset by borrowings of long-term debt. Business acquisitions of $10.2 million consisted of the purchase of a Ford dealership in Ceres, California, and a used truck dealership in Jacksonville, Florida, including the real estate associated with each dealership. In addition, we purchased 50% of the equity interest in RTC Canada for $22.5 million, which is treated as an equity method investment.

 

During 2018, cash used in investing activities was $227.2 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures. Capital expenditures totaled $238.3 million during 2018 and consisted primarily of purchases of property and equipment, improvements to our existing dealership facilities and $157.4 million for purchases of rental and lease vehicles for the rental and leasing operations, which were directly offset by borrowings of long-term debt.

 

Cash Flows from Financing Activities

 

Cash flows provided by (used in) financing activities include borrowings and repayments of long-term debt and net payments of floor plan notes payable. During 2019, our financing activities resulted in net cash used in financing of $50.9 million. The cash outflows consisted primarily of $191.9 million used for principal repayments of long-term debt and capital lease obligations, $135.0 million for payments on a line of credit, $104,000 from net payments on floor plan notes payable (non-trade), and $58.2 million used to purchase 1,264,032 shares of Rush Class A common stock and 275,554 shares of Rush Class B common stock during 2019. Additionally, during 2019, we paid cash dividends of $18.3 million. These cash outflows were partially offset by borrowings of $210.0 million of long-term debt for the purchase of additional units for our rental and leasing operations, $135.0 million from draws on a line of credit and $8.2 million from the issuance of shares related to equity compensation plans.

 

During 2018, net cash provided by financing activities was $19.1 million. The cash outflows consisted primarily of $179.5 million used for principal repayments of long-term debt and capital lease obligations and $120.6 million used to purchase 2,857,580 shares of Rush Class A common stock and 405,606 shares of Rush Class B common stock during 2018. Additionally, during 2018, we paid cash dividends of $9.3 million. These cash outflows were partially offset by borrowings of $156.8 million of long-term debt for the purchase of additional units for our rental and leasing operations, $167.8 million from net draws on floor plan notes payable (non-trade) and $3.9 million from the issuance of shares related to equity compensation plans.

 

Most of our commercial vehicle inventory 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. We finance the majority of all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under the Floor Plan Credit Agreement. The Floor Plan Credit Agreement includes an aggregate loan commitment of $1.0 billion. 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 commercial vehicle 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 December 31, 2019, we had approximately $846.8 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $857.8 million during the year ended December 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.

 

Navistar Financial Corporation and Peterbilt offer trade terms that provide an interest-free inventory stocking period for certain new commercial vehicles. This interest-free period is generally 15 to 60 days. If the commercial vehicle is not sold within the interest-free period, we then finance the commercial vehicle under the Floor Plan Credit Agreement.

 

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 A.C.T. Research, in recent years, total U.S. retail sales of new Class 8 commercial vehicles have ranged from a low of approximately 97,000 in 2009, to a high of approximately 281,440 in 2019. Through geographic expansion, concentration on higher margin Aftermarket Products and Services and diversification of our customer base, we have attempted to reduce the negative impact of adverse general economic conditions or cyclical trends affecting the Class 8 commercial vehicle industry on our earnings.

 

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Off-Balance Sheet Arrangements

 

Other than operating leases entered into prior to the adoption of ASU No. 2016-02, “Leases (“Topic 842”)” on January 1, 2019, we do not have any obligation under any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, that has or is reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Contractual Obligations